(703) 625-6833 ccmiel@bpo-capital.com

MARKET RECAP & LOOKING FORWARD:

 

After a rough start to August, the S&P 500 clawed back to finish the month down -1.58%.  Bonds continued to be aggressively bid, and yields on the 30-yr Treasury Bond ended under 2.00%.  The 2/10 yield curve – after steeping up to 10bps after inverting mid-month – inverted once again and closed out August under 0.  Some strange things are happening in fixed income (other than curve inversions):  nearly $17 trillion of negative-yielding bonds around the globe exist (and this number seems to balloon each month), the 10-yr Treasury yield is significantly less than 3-month LIBOR (chart below which speaks volumes around where we are in the cycle), it is also 50bps less than the current yield on the S&P 500, and real yields on the 10-yr are now negative.  Fixed income isn’t really that “fixed” right now.  It’s hard to tell if its broken, either.  Economic data is ugly and yields can keep going lower.  Yields in many other developed countries are much lower than ours.  Why can’t we be next?  However, bonds (yes bonds) seem riskier today than they have been in a long time – especially corporates.  It’s worth considering that an entire generation of bond traders out there have never experienced pain.

 

An argument which many strategists and investors are touting today is: relative to where bond yields are, stocks are actually cheap.  That’s a valid point.  As mentioned above, the yield on the S&P 500 is significantly higher than the 10-yr Treasury yield, and many individual equities in the S&P have double + the yield of the 10-yr.  But other than being attractive relative to bonds, valuations of many companies are extremely expensive relative to themselves and their respective sectors, earnings are okay, forward guidance is weak, and broad economic data is bad.  Doesn’t sound like a bull market cocktail.  More than half of the PMIs around the world are now below 50.  Most of the world’s economies are currently in contraction.  With all this being said, there are certain sectors – and equities within those sectors – that are attractive in my opinion.  Parts of Energy, Financials, and Materials do look very cheap.  And President Trump has been hellbent on the stock market living at all-time-highs.  Why wouldn’t he make sure that’s the case headed into next year’s election? 

 

Market-moving news is 24/7 with Twitter.  Algo’s + Twitter often creates tradeable dislocations and opportunities in the short-term.  But I think whatever Tweets are being exchanged, press releases being sent, or strategists on CNBC claiming, things between the U.S. and China are getting worse and not better.  Is President Trump buying enough time keep equities from falling too far, while more aggressive rate cutting (with or without Powell) are on the horizon?  And then he gets a trade deal done?  Maybe that’s the 1-2 punch to lift the S&P 500 another 10-20% heading into the election after a few negative quarters starting now and into early next year.  Just a thought.  What the Fed has done, has said, will do and will say should supersede all other factors – especially this long into the current expansion and with the amount of debt out there.  What’s left to fight the next downturn?  Has the Fed done too little, too late?  As always, watch the Fed, the data, interest rates, earnings and guidance.  

 

Is this a weird market?  Yes.  But weird is good for active management and tactical money managers. 

 

 

CHARTS & THEMES WORTH WATCHING   

 

12-month performance of Transports & Small Caps vs. the S&P 500:  notably lagging  

 

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Source:  Bloomberg

                                       

 

The S&P 500 started and ended the past 12 months @ 2900

 

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Source:  Bloomberg

 

 

Negative-Yielding global debt increased by more than $2 Trillion in Aug & now = $16.8 trillion

 

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Source:  Bloomberg

 

 

Spread b/t 3-month LIBOR & 10-yr Treasury Yields

 

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Source:  Bloomberg

 

 

TLT or Beyond Meat? 

 

Source:  Bloomberg

 

 

The Spread b/t the S&P 500 & MSCI World Index remains wide (S&P 500 has been the place to be)

 

Source:  Bloomberg

 

 

S&P 500 uptrend from December-lows 2940-2950.  Under this level remain cautious

 

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Source:  Bloomberg

 

 

U.S. trading partners by size (just to have handy for whoever we fight with next)

 

Source:  Bloomberg

 

 

Treasury Bonds held by China (no longer the largest holder of our debt)

 

Source:  Bloomberg

 

 

Treasury Bonds held by Japan (now the largest holder of our debt)